HTC and Facebook have reportedly teamed up on a design code-named "Buffy"

Newly public Facebook, Inc. (FB) is still recovering from a tumultuousinitial public offering, and the criticisms and condemnations that ensued over its underwriter Morgan Stanley's (MS) questionable handling of insider information on the IPO. Now the internet giant has been forced to yet again address a regular rumor -- that it's making a smartphone.

I. Facebook's "Buffy" Phone is A-Go

But this time around the rumor has much more meat to it, thanks to a report in The New York Times. The report deals how Facebook has hitched up with Taiwan's HTC Corp. (TPE:2498) to make a phone code-named "Buffy". HTC will develop the hardware while Facebook would develop the software.

According to a Facebook employee, they were briefed that the company had snared "half a dozen" former engineers on Apple, Inc.'s (AAPL) iPhone team and an engineer from the iPad team to help with the project. According to the source and an Apple engineer who was recruited by apparently turned down the offer, this is Facebook's third shot at a smartphone.

The company's alleged first go in 2010 was leaked byTechCrunch, but never materialized. Likewise in 2011, "Buffy" was first reported on by AllThingsD, but the project yet again failed to show. Now it appears "Buffy" is back with a vengeance -- or so The New York Times claims.

An engineer working at Apple recalls meeting with Mark Zuckerberg and being grilled about intimate details about smartphones, including the nature of the various chips used inside the iPhone. While Facebook's past efforts have reportedly been modest, the new report indicates this time Facebook is getting serious, expanding its team of hardware experts to make "Buffy" a reality.

With rival social networks like Google Inc.'s (GOOG) Google+ gaining some traction, social networking giant Facebook is reportedly eyeing becoming an OS developer as a way to more tightly integrate its network to mobile devices and avoid just being another web firm.

Facebook, with the help of HTC and newly acquired Instagram is reportedly preparing a new smartphone, code-named "Buffy". [Image Source: Facebook]

A Facebook engineer with knowledge of the project explains, "Mark [Zuckerberg] is worried that if he doesn’t create a mobile phone in the near future that Facebook will simply become an app on other mobile platforms."

Still Facebook is reportedly keeping secretive about the project by not posting job listing in traditional online ads, and instead recruiting its network of real-world social connections.

II. Facebook Explores Hardware Options, Possibility of an Acquisition

The hardware side of the project has reportedly been the key obstacle for Facebook. Sources say the company initially hope to simply "figure out" how to make a phone, but quickly recognized the need for design experts, hence the several project reboots.

But Facebook does have a good start on the software side. There are builds of Facebook that reportedly can function as more or less a stand-alone operating system. And Facebook has built-in imaging capabilities via its purchase of industry giant Instagram. Plus there's the thousands of apps in Facebook's in-house app store, which include hit social gaming titles like Farmville.

The IPO, despite its flaws gave Facebook $16B USD to invest in new business. Some suspect Facebook could buy Waterloo, Ontario's Research in Motion, Ltd (TSE:RIM) (makers of the BlackBerry smartphone) or HTC. RIM is worth less than $6B USD, while HTC's valuation is reported around $11.8B USD. Both companies have plunging value amid sales troubles.

HTC is reportedly an especially interesting idea, given that the companies have already casually collaborated on "Buffy". Plus, according to The New York Times, HTC is "upset with Google for buying Motorola."

An analyst for Gartner, Inc. (IT), Carolina Milanesi, says a Facebook phone would be more trouble for Google than Apple. After all, its advertising-driven business model, combined with plans for low-cost handsets would indicate a jump into the world of handsets that retail for $100 USD or less (with contract) in the U.S. -- a market where Apple dominates. Apple's customers occupy quite a different bracket, willing to pay hundreds of dollars for their latest toy.

She says, "When you offer an advertising-based phone, you’re targeting all the users on prepay that are budget-conscious of their communications costs."

With the success of the ad- and tie-in-subsidized Amazon.com, Inc. (AMZN) Kindle Fire tablet, both Google and Facebook are reportedly interested in pursuing free high end hardware devices that turn big profits by assailing users with a steady flow of advertisements. Such an untested approach will certainly have its issues (most notably battery life from all the extra screen use), but it could lure in many budget buyers who have been wary of a smartphone switch.

In my opinion facebook have its days counted, they are going in the wrong direction.

"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer